Why there is little hope for Saradha revival

Why there is little hope for Saradha revival

Over a month into the collapse of the Saradha group in West Bengal, with suicides totalling double digits and widespread social distress in rural and semi-urban areas, the chances of depositors getting back even a small part of their money get slimmer.

It is slowly dawning that a deposit-taking company which survives on new deposits, brought in by collection agents who are paid very high commission, to repay old deposits is bound to collapse.

The history is that this is mostly so, but for one exception -- Peerless General Finance and Investment Co, which was turned around a decade ago.

Before the turnaround, it bore a remarkable resemblance to many aspect of the Saradha operation.

Why there is little hope for Saradha revival

But what helped it come back from the brink is some crucial differences and of course an innovative strategic turnaround operation that worked.

Hence, the question now is -- can there be some lessons from the Peerless turnaround which can be of help in picking up the pieces of Saradha?

Peerless, incorporated in 1932, was first in the life insurance business until the sector was nationalised in 1956.

Thereafter, as it engaged in taking deposits and investing, over time, it came under the category of residuary non-banking companies, which were officially under the watch of the Reserve Bank of India, but were very lightly regulated.

Why there is little hope for Saradha revival

Trouble began for Peerless when in 1987 RBI sought to ban it under the act of disallowing prize chits.

The regulator's main concern was that Peerless shared a depositor's first year's subscription with its agent as income and did not recognise it as a liability.

Peerless went to court and secured a ruling from the Supreme Court in its favour.

Then RBI issued the non-banking companies direction requiring them to keep deposits in approved securities.

But crucially, while assiduously overseeing how banks invested all the deposits placed with them, it allowed RNBCs to invest freely 20 per cent of their deposits, while directing that the rest 80 per cent be placed in governments securities.

Why there is little hope for Saradha revival

In 1996, D N Ghosh, former civil servant and chairman of State Bank of India, after months of deliberation, responded to requests by a succession of people and became the chairman of Peerless.

The first to request was none other than S K Roy, the promoter of Peerless, then it was finance minister Manmohan Singh, thereafter RBI governor C Rangarajan and finally the then West Bengal chief minister Jyoti Basu.

Ghosh, who had a wide exposure to both the public and the private sectors (he had been chairman of Larsen & Toubro and Philips India), scripted and oversaw the turnaround with the same earlier management, led by S K Roy, in place.

Outlining a crucial difference between Saradha and Peerless, Ghosh says: "The late B K Roy, who was the architect of the post-life insurance Peerless, did not want to cheat people."

Why there is little hope for Saradha revival

He recalls that for the turnaround, he had support from two crucial quarters: "Jyoti Basu and Peerless managing director S K Roy stood by me."

Armed with this, and also aided by important 'concessions' secured from RBI, then under governor Bimal Jalan, he was able to see the turnaround through.

Ghosh adopted a four-pronged strategy and secured the support of two well known professionals -- Dipankar Basu, former chairman of SBI (now chairman of Peerless) and S M Dutta, former chairman of Hindustan Lever -- who joined the board.

The elements of the strategy were: liquidate most of the assets held through subsidiaries and associate companies in unrelated fields like shipping and liquor and retain only three customer interactive cash generating operations -- hotel, hospital and realty; recover loans given across the board to important entities and corporates; revamp and redesign the investment operations so that they earned a proper return; and redo entirely the internal audit and inspection mechanism.

Why there is little hope for Saradha revival

The turnaround was made possible by RBI allowing Peerless to continue to accept deposits.

Initially, after the restructuring of the balance sheet and the incentive scheme for deposit canvassing agents, bringing down their commission drastically (from 15 per cent to eventually 4.6 per cent), the flow of new deposits and renewals fell substantially.

But once the company changed its entire business strategy and faith in its ability to survive rose, deposit accretion picked up.

Ghosh admits candidly: "If we had not been allowed to access fresh deposits, we would not have been able to repay old depositors, meeting all commitments."

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Image: A hand rickshaw puller rests on a pavement in Kolkata.Photographs: Jayanta Shaw/Reuters

Why there is little hope for Saradha revival

In the last years of the 1990s, the going while restructuring was tough. But a crucial opportunity came in the early 2000s with the fall in interest rates.

In 2002-03, Peerless reclassified Rs 2,140 crore (Rs 21.4 billion) of its holdings in government securities as stock in trade and these were actively traded in the market.

In the soft interest rate regime, government securities prices rose.

Both Peerless and public sector banks, which held government securities in excess of their SLR (statutory liquidity ratio) requirements, actively traded in these securities. Peerless earned Rs 166 crore (Rs 1.66 billion) trading profits in the year. The year 2003 turned out to be a historic year for Peerless. It was able to announce a full turnaround.

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Image: (Inset) Debjani Mukherjee, one of the directors of Saradha group.

Why there is little hope for Saradha revival

Ghosh was able to deliver within the seven years time that he had taken from RBI.

The annual general meeting that year which took on record the accounts for 2002-03 sent a powerful message through the financial sector and the media picked it up.

The hole in the balance sheet had been filled and Peerless had a net worth of Rs 225 crore (Rs 2.25 billion) and a healthy capital adequacy ratio of 14 per cent without any fresh equity being brought in.

There are some memorable vignettes in the turnaroud story.

In seeking to salvage impaired assets and recover loans, Peerless went to the extent of taking to court even state governments like those of Kerala and Assam.